Monday, 2 July 2012

The Roots of the Crisis

After
watching a lecture by Professor Heiner Flassbeck at the University of Leipzig, I
felt the need to share some thoughts with you. Brieler’s central thesis was
that Germany is largely to blame for the development of the debt crisis that is
continuing to haunt Europe. An economy that on the one hand praises its cheap
and high-quality products, but that on the other hand expects its southern neighbours
to boost their competitiveness, should not wonder if its expectations are
anything but met. Germany runs the largest export surplus in Europe, and the
sum of its exports in terms of absolute value surpasses those of all countries
except China – a country more than 15 times larger. Brieler argued with
convincing clarity, that if a country runs its economy in this manner, there
must inevitably also be a country that buy its products. That is the case not
only because the sum of the values in a closed system must be zero, but also
because the low wage policy of several consecutive German governments has
killed off the last remaining shreds of a German domestic market. We may
produce products cheaply, but in return, wages are necessarily low, causing domestic
demand to shrink to insignificance compared to external demand. Germany’s
costumers live in the south of Europe, but instead of supporting their
economies to ensure the success of the monetary union, Germany has lowered its
wages even further. Germany has outcompeted its own costumers! This would in
itself not be a problem, if those costumers weren’t countries. In the business
world, the demise of one company will give rise to another. With states, this
process doesn’t work. Who will come to replace Greece, Spain, Portugal and to
some extent even France? Surely no different nations will rise in the south of
Europe, taking their place.

Public
awareness of these easily understandable concepts would assist the elimination
of prejudices that are beginning to undermine the future of the European
project. The tabloid press is full of articles feeding into stereotypes about
the lazy Greeks and the Nazi Germans. If only the most primitive of economic
concepts, such as the ones outlined above were understood by the general
public, and if policy-makes and economists were the use simple logic, many of
these concerns could be resolved, revealing the reality of a continent that is
exposed to a capitalist system that has seized to function and that has learned
nothing from the turmoil of the financial crisis. Germany, being the economic
giant that it is, needs to boost the spending capabilities of its own
population by raising its wages. There may be some truth to the idea that the
south has lived above its standards, as wages were high, while productivity was
low (cutting wages and pensions is nevertheless the last thing one should do,
but more about that another time). However, what is even more striking is the
extent to which Europe’s ‘core’, with its high productivity and low wages, has
lived below its standards.